Economic rebound may speed rate rise

Markets point to interest rate rise towards the end of 2015, though economists
say Bank of England is wrong on productivity and rates will rise sooner

The Bank acknowledged last month that a fall in the claimant count suggested unemployment would likely fall "at a faster pace than anticipated". It currently predicts annual growth of 1.4pc in 2013 and 2.4pc in 2015.Photo: Alamy

The Bank of England is expected to upgrade its growth forecasts for the UK economy this week and pave the way for an earlier interest rate rise.

Record numbers of Britons in employment, upbeat survey data and rising business optimism means the Bank is under pressure to change its unemployment forecasts at this week's Inflation Report. Governor Mark Carney pledged in August to hold rates at 0.5pc until the jobless rate falls to at least below 7pc.

The Bank currently believes this will happen in the second half of 2016. Markets took little notice of forward guidance when it was announced, and currently expect a rate rise in the third quarter of 2015. Economists who disagree with the Bank's view that productivity will grow, said the first rise could come even earlier.

"You may only need to create 250,000 jobs to get the unemployment rate to 7pc, whereas under the Bank's assumptions about higher productivity and a greater participation rate, you'll need to see 800,000 jobs," said James Knightley, an economist at ING.

"If we get to the threshold towards the end of 2014 - coupled with the fact that the economy is growing, inflation is above target and you have a housing market that's going like the clappers - this is the type of environment where you should start tightening policy."

Services data last week suggested that the UK is creating more than 100,000 jobs per quarter, far higher than the average of 70,000 seen over the past year. UK growth is now on track to hit 1.5pc in the final quarter, translating into a growth rate of 1.6pc in 2013.

The Bank acknowledged last month that a fall in the claimant count suggested unemployment would likely fall "at a faster pace than anticipated". It currently predicts annual growth of 1.4pc in 2013 and 2.4pc in 2015.

Economists said the Bank was also unlikely to change forward guidance and lower the unemployment threshold in order to keep rates lower for longer. "To move the goalposts after the shortest possible time seems too much," said George Buckley, chief UK economist at Deutsche Bank.

Ross Walker, a senior economist at RBS, expects the Bank to bring forward the point where the 7pc threshold is reached to the first quarter of 2016. "The Bank will presumably want to guard against any overly 'hawkish' market reaction [to the revision], so we would expect these revised forecasts to be accompanied by some cautious rhetoric," he said.

Data next week will also indicate how a second wave of Government subsidies has impacted the mortgage market. Help to Buy phase two, which provides lenders with a guarantee to cover part of the loan in the event that a borrower defaults, launched a month ago. Phase one, which covers new build properties, has been credited with creating thousands of jobs in the sector.